Rajan Saga

Q1. How would you rate current RBI governor Raghuram Rajan and his term on the face of his policies and activities than a person?

A1: The RBI’s performance during the past three years was better than that during the previous three to five years. I can say this much.

Q2. Looking at the current mounting NPAs of the public sector banks in India, does it look possible that banks’ balance sheets will look cleaner by 2017? Do you think RBI under Rajan’s leadership swung into action little late when it comes to cleaning the NPA mess? 

A2: The NPAs mounted from 2010 to 2013, they are being recognised and revealed over the past few years. Both RBI and government (with respect to public sector Banks) were a little slow in focusing on them.

Q3. It is widely believed that Raghuram Rajan was successful in bringing down the CPI index which is the indicator of inflation. Has he made the right move by adopting CPI as an inflation index and ignoring WPI index? If he has not, then can you suggest what could have been the right ones?

A3: The creation of the national CPI was initiated, when I was Chief Economic Advisor. Once it was created it was necessary to switch over to it as per global best practice. Unfortunately, global deflationary forces have opened a large gap between CPI and WPI, which complicates the changeover. A more pragmatic approach would have been used and this indicates in setting a lower value for the neutral real repo rate target.

Q4. Amid his achievement, when Rajan started with his rate cut cycle he did very little to give liquidity to the money market as some experts claim. Do you agree with the statement that the incumbent governor of RBI has kept the money market gasping for a long time?

A4: Monetary policy in a less developed financial market like India doesn't work like the near perfect markets of the US or UK. Thus, the repo rate is an inadequate instrument. Traditional measures like reserve money, money supply/credit growth continue to be relevant.

Q5. Rajan has been successful in stabilising the rupee – dollar price in a range of Rs 66 to 68. However, on the other hand, it also made Indian imports a bit expensive. What is your take on this?

A5: From macro-economic perspective, the important rate is not the RS USD, but the real effective exchange rate, which depends on the inflation differential between India and the world. A real appreciation of the rupee, as happened under the previous governor, is bad for competitiveness of Indian economy.

Q6. It is widely believed that Rajan has been successful in curbing the inflation which was the prime agenda when he took the office. However, the RBI governor has been accused of keeping interest rates higher for too long. Do you agree?

A6: Governor has been successful in curbing inflation expectations. Most of the decline in deflation is due to declines in commodity prices, global deflation and better management of food economy. However, real policy rates have risen sharply during this process, resulting in an ending of real monetary policy in a period when the large corporate sector is weak. I have argued for faster easing of monetary policy for the last 12-18 months.

Q7. From a borrower’s point of view how efficient is the MCLR, (Marginal Cost Lending Rate)? As the new borrowers are postponing the home loan in anticipation of much lower interest rates. On the other hand, existing borrowers are worried that banks may charge hefty conversion fees to shift them from base rate to new lending rate i.e. MCLR.

A7: I don't think there has been much impact either way.

Q8. The markets on the REXIT issue has not reacted much. Do you think the issue of REXIT was wider than the policies which he implemented? Was the discussion by the corporate leaders and general public stand valid? Does it reflect an individual is bigger than the institution?

A8: Most of the issues have a short term effect, but what matters in the medium term is the policies adopted, now and in future.